UNIT 4

Capital Market and Indices

Program : MBA Tech. Sem:IX
Course : Investment Banking
Module Code : MBAB09004 IB
Prepared by Amit Kamkhalia MBA/MMS Finance JBIMS 2002
UNIT 4

Capital Markets: Significance of Indian and Global capital markets,

Capital markets v/s money markets, Valuation of Right Issue, players –
investors and companies, Primary and secondary markets in India
and abroad Current developments,
Reading: Subramanyam, P.G. (2011). Investment Banking. New Delhi,
Tata Mc Graw Hill. Chapter 1.
CO - : 1

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What is a Capital Market?
▪ A capital market is a market for medium and long-term funds. Such funds are
arranged in the capital market, which are procured for a duration of 1 year. In
Capital Market, buying and selling financial securities like shares, debentures,
bonds, etc.

▪ The capital market is an organised mechanism for the effective transfer of

financial resources from the investing parties to the entrepreneurs engaged in
the business, whether in the private sector or public sectors of an economy.

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Components of Financial Markets

Money Market Capital Market

Debt Market Equity Market

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Components of Financial Markets

Money Market Capital Market

The money market refers to trading in very short-term

debt investments. At the wholesale level, it involves
large-volume trades between institutions and traders.
Debt MarketAt Equity Market
the retail level, it includes money market mutual funds
bought by individual investors and money market
accounts opened by bank customers.

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Components of Financial Markets

Money Market Capital Market

A capital market is a
financial market in
which long-term debt
(over a year) or equity-
backed securities are Debt Market Equity Market
bought and sold

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What is Money Market?
▪ Money markets are those markets where borrowing and lending of short term
funds (maturity 1 day to 1 year) takes place. Due to short maturity, the
instruments of money market are liquid and can be converted to cash easily.
Thus the money markets are able to address the need of the short term surplus
fund of the lenders and short term borrowing requirements of the borrowers.
The interest rates get determined in the money markets.

▪ Therefore the money markets work as a mechanism whereby borrowers

manage to obtain short term loan funds on the one hand, and lenders succeed
in getting credit worthy borrowers for their money on the other. In this way, any
institution or person who is willing to provide short-period monetary debt
becomes a part of the money market.

▪ Under Indian money market, the Reserve Bank of India occupies the central
position because it regulates and controls the credit supply of the country.

▪ The Indian money market is divided into two sectors:

1. The Unorganised sector. 2. The Organised sector.

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 What is
Capital Market?
• A capital market can be either a primary market or a secondary market. In a primary market, new
stock or bond issues are sold to investors, often via a mechanism known as underwriting. The
main entities seeking to raise long-term funds on the primary capital markets are governments
(which may be municipal, local or national) and business enterprises (companies).
• Governments issue only bonds, whereas companies often issue both equity and bonds. The main
entities purchasing the bonds or stock include pension funds, hedge funds, sovereign wealth
funds, and less commonly wealthy individuals and investment banks trading on their own behalf.
• In the secondary market, existing securities are sold and bought among investors or traders,
usually on an exchange, over-the-counter, or elsewhere. The existence of secondary markets
increases the willingness of investors in primary markets, as they know they are likely to be able to
swiftly cash out their investments if the need arises.
• A second important division falls between the stock markets (for equity securities, also known as
shares, where investors acquire ownership of companies) and the bond markets (where investors
become creditors)
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 Debt versus Equity
Debt
▪ Not an ownership interest
▪ No voting rights
▪ Interest is tax-deductible
▪ Creditors have legal recourse if
interest or principal payments are
missed
▪ Excess debt can lead to financial
distress and bankruptcy
Equity
▪ Ownership interest
▪ Common stockholders vote to elect the
board of directors and on other issues
▪ Dividends are not tax deductible
▪ Dividends are not a liability of the firm
until declared. Stockholders have no
legal recourse if dividends are not
declared
▪ An all-equity firm cannot go bankrupt
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Significance of Indian and Global capital markets
▪ The basic purpose of the capital markets is to match the forces of demand and
supply of funds and in the process, play a vital role in channelizing saving and
investments in the financial system.
▪ For speedy economic development, adequate capital formation is necessary,
and the capital market has a crucial significance to capital formation.
▪ In simple words, capital markets facilitate the buying and selling of debt as well
as equity instruments, both in the primary and secondary markets.

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Significance of Indian and Global capital markets
Market Capitalization of World’s Largest Stock Exchanges: Dec 2019
(US $ Trillions)

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Significance of Indian and Global capital markets
▪ The capital market provides the support to the system of
capitalism of the country. The Securities and Exchange Board of
India (SEBI), along with the Reserve Bank of India are the two
major regulatory authority for Indian securities market, to protect
investors and improve the microstructure of capital markets in
India. With the increased application of information technology,
the trading platforms of stock exchanges are accessible from
anywhere in the country through their trading terminals.

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Broad Constituents in the Indian Capital Markets
Fund Raisers
Fund Raisers are companies that raise funds from domestic and foreign sources, both public and private. The following
sources help companies raise funds.
Fund Providers
Fund Providers are the entities that invest in the capital markets. These can be categorized as domestic and foreign
investors, institutional and retail investors. The list includes subscribers to primary market issues, investors who buy in
the secondary market, traders, speculators, FIIs/ sub-accounts, mutual funds, venture capital funds, NRIs, ADR/GDR
investors, etc.
Intermediaries
Intermediaries are service providers in the market, including stock brokers, sub-brokers, financiers, merchant bankers,
underwriters, depository participants, registrar and transfer agents, FIIs/ sub-accounts, mutual Funds, venture capital
funds, portfolio managers, custodians, etc.
Organizations
Organizations include various entities such as MCX-SX, BSE, NSE, other regional stock exchanges, and the two
depositories National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CSDL).
Market Regulators
Market Regulators include the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI), and the
Department of Company Affairs (DCA).
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 Role And Importance Of Capital Markets In India
• Mobilization Of Savings And Acceleration Of Capital Formation: In this market, various types of securities help to mobilize savings from various sectors of the population.
The twin features of reasonable return and liquidity in stock exchange are definite incentives to the people to invest in securities. This accelerates the capital formation in
the country.
• Raising Long-Term Capital The existence of a stock exchange enables companies to raise permanent capital. The investors cannot commit their funds for a permanent
period but companies require funds permanently. The stock exchange resolves this dash of interests by offering an opportunity to investors to buy or sell their securities,
while permanent capital with the company remains unaffected.
• Promotion Of Industrial Growth The stock exchange is a central market through which resources are transferred to the industrial sector of the economy. The existence of
such an institution encourages people to invest in productive channels. Thus it stimulates industrial growth and economic development of the country by mobilizing funds
for investment in the corporate securities.
• Ready And Continuous Market The stock exchange provides a central convenient place where buyers and sellers can easily purchase and sell securities. Easy marketability
makes an investment in securities more liquid as compared to other assets.
• Technical Assistance An important shortage faced by entrepreneurs in developing countries is technical assistance. By offering advisory services relating to the preparation
of feasibility reports, identifying growth potential and training entrepreneurs in project management, the financial intermediaries in capital market play an important role.
• Reliable Guide To Performance The capital market serves as a reliable guide to the performance and financial position of corporate, and thereby promotes efficiency.
• Proper Channelization Of Funds The prevailing market price of a security and relative yield are the guiding factors for the people to channelize their funds in a particular
company. This ensures effective utilization of funds in the public interest.
• Provision Of Variety Of Services: The financial institutions functioning in the capital market provide a variety of services such as a grant of long-term and medium-term
loans to entrepreneurs, provision of underwriting facilities, assistance in the promotion of companies, participation in equity capital, giving expert advice etc.
• Development Of Backward Areas Capital Markets provide funds for projects in backward areas. This facilitates economic development of backward areas. Long-term funds
are also provided for development projects in backward and rural areas.
• Foreign Capital Capital markets make possible to generate foreign capital. Indian firms are able to generate capital funds from overseas markets by way of bonds and
other securities. The government has liberalized Foreign Direct Investment (FDI) in the country. This not only brings in the foreign capital but also foreign technology
which is important for economic development of the country.
• Easy Liquidity With the help of secondary market, investors can sell off their holdings and convert them into liquid cash. Commercial banks also allow investors to
withdraw their deposits, as and when they are in need of funds.
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Type of capital markets
Primary Market
▪ The primary market is also known
as New Issue Market, where a
company brings Initial Public Offer
(IPO) to get itself listed on the stock
exchange for the first time. In the
primary market, the rallying of
funds is done through the right
issue, private placement, and
prospectus.
▪ The funds that are collected by the
company in the IPO is used for its
future growth. Primary markets also
help investors invest their savings in
the companies that are planning to
expand their enterprises
Secondary Market
▪ In the secondary market, the
securities that are already listed on
the exchange are traded by
investors.
▪ The trading done on the stock
exchange and over the counter falls
under the secondary market
category.
▪ Examples of secondary markets in
India are the National Stock
Exchange (NSE) and the Bombay
Stock Exchange (BSE) ,Metropolitan
Stock Exchange Etc
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How are funds raised?
▪ Public Issue
▪ Private Placements
▪ Rights Issue
▪ Global Listing
▪ Global Borrowing
▪ Syndicated Loans

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Functions of the Capital Market
▪ It helps in the movement of capital from the people who save money to the people
who want more money.
▪ It assists in financing long-term projects of the companies and Encourages the
investors to own the range of productive assets.
▪ It also minimizes the cost of transactions.
▪ It helps in the faster valuation of financial securities like debentures and shares.
▪ It Creates liquidity in the market by accelerating the trading of securities in the
secondary market.
▪ It offers protection against price or market risks through the trading of derivative
instruments.
▪ It helps in operative capital allocation by way of a competitive price mechanism.
▪ It helps in the creation of liquidity and regulation of funds.

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Distinction between Capital Market and Money Market
▪ Participants: The participants in the capital market are financial institutions, banks, corporate entities, foreign investors and ordinary retail investors from
members of the public. Participation in the money market is by and large undertaken by institutional participants such as the RBI, banks, financial
institutions and finance companies. Individual investors although permitted to transact in the secondary money market, do not normally do so.

▪ Instruments: The main instruments traded in the capital market are – equity shares, debentures, bonds, preference shares etc. The main instruments
traded in the money market are short term debt instruments such as T-bills, trade bills reports, commercial paper and certificates of deposit.

▪ Investment Outlay: Investment in the capital market i.e. securities does not necessarily require a huge financial outlay. The value of units of securities is
generally low i.e. Rs 10, Rs 100 and so is the case with minimum trading lot of shares which is kept small i.e. 5, 50, 100 or so. This helps individuals with
small savings to subscribe to these securities. In the money market, transactions entail huge sums of money as the instruments are quite expensive.

▪ Duration: The capital market deals in medium and long term securities such as equity shares and debentures. Money market instruments have a
maximum tenure of one year, and may even be issued for a single day.
▪ Liquidity: Capital market securities are considered liquid investments because they are marketable on the stock exchanges. However, a share may not
be actively traded, i.e. it may not easily find a buyer. Money market instruments on the other hand, enjoy a higher degree of liquidity as there is formal
arrangement for this. The Discount Finance House of India (DFHI) has been established for the specific objective of providing a ready market for
money market instruments.
▪ Safety: Capital market instruments are riskier both with respect to returns and principal repayment. Issuing companies may fail to perform as per
projections and promoters may defraud investors. But the money market is generally much safer with a minimum risk of default. This is due to the
shorter duration of investing and also to financial soundness of the issuers, which primarily are the government, banks and highly rated companies.
▪ Expected return: The investment in capital markets generally yield a higher return for investors than the money markets. The possibility of earnings is
higher if the securities are held for a longer duration. First, there is the scope of earning capital gains in equity share. Second, in the long run, the
prosperity of a company is shared by shareholders by way of high dividends and bonus issues

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Types of Issue of Shares
Issue of share is a process through which company issues fresh shares to present and new shareholders for raising required capital. Share
is termed as the smallest unit of company’s overall capital. Shareholders of company can either be corporates, institutions or individuals.
A procedure of share issue is conducted by companies in accordance with rules prescribed in companies act 2013. Issue of shares is
composed of three basic steps that are issuing prospectus, receiving applications and finally allotment of shares. These steps are followed
by every company while initiating their process of issuing shares. Process of creating new shares by company is termed as Allotment or
Allocation. Shares are issued by companies for acquiring funds from general public for financing its operations, repaying debts, funding
new projects or for acquisition of other companies
Public Issue : Public issue is an issue where shares or convertible securities are issued by company in primary market with the help of its
promoters. Under this type of issue, shares are offered to general public for raising the needed funds by enterprise. Companies issues a
prospectus for attracting investors and those who are willing to subscribe for shares are required to make an application to company.
Company after receiving applications then finally issues shares to public.
Public issue is of 2 kinds: Initial public offer (IPO) and Further public offer.
Right Issue : Right issue refers to selling of shares or convertible securities to present shareholders by companies. This issue is made at a
concessional rate on specified time set by company itself. Right issue is done for raising additional amount of funds via issuing shares to
existing equity shareholders in proportion of their shareholdings in place of doing a fresh issue.
Bonus Issue : Bonus issue refer to offering of free shares by company to current shareholders in addition to shares held by them. These
shares are issued in proportion to fully-paid up equity shares held by shareholders. Bonus shares are issued free of any cost and are
made out of free reserves or securities premium account of company.
Composite Issue : A composite issue is made by previously registered company. Under this type of issue, company issues share on
public-cum-rights basis and make shares allotment on concurrent basis.
Private Placement Private placement is such issue of shares under which company offers its share to selected group of investors that can
be banks, pension funds, insurance companies, mutual funds and so forth in order to acquire the required funds. Various kinds of private
placement are Preferential issue, Institutional Placement Program (IPP) and Qualified Institutional Placement (QIP)..
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Valuation of Rights Issue
▪ Usually a company offers right issue at a price which is lower than the market price of the shares so that the existing
shareholders may get the monetary benefit of being associated with the company for a long time. Existing
shareholders who have been offered rights shares and do not want to purchase these offered shares may renounce
their right in favour of some other person within the specified period.
▪ In such a case, the existing shareholders can make a profit by selling his right to such other person because generally
the rights shares are offered to the existing shareholders at a price lower than the market price of the shares. The right
to purchase more shares is valuable if the market price of the shares is more than the issue price.

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Valuation of Rights Issue
METHOD
Data Needed - Market Price of Company Shares ,Amount to be raised ,Number of new Rights Shares

▪ Price of rights shares

Market value of the shares already held by shareholder (Market Price x Number of shares) xxx
Add: Price to be paid for buying one share xxx
Total shares (Value of Existing and Rights shares) XXX

▪ Average price of one share: Total Value of Existing and Rights shares Divided by Total Number of Shares( Existing and
Rights)
▪ Value of the right = Market value – Average price
▪ OR Value of Right = (No. of New Shares/ Total No. of all Shares) (Market Price – Issue Price of new share)

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Valuation of Rights Issue
METHOD
For instance: A company has decided to increase its existing share capital by making rights issue to its existing
shareholders. The company is offering one new share for every two shares held by the shareholder. The market value of
the share is Rs. 240 and the company is offering one share of Rs. 120 each.

▪ Price of rights shares

Market value of the shares already held by shareholder (Rs. 240 x 2 shares) Rs. 480
Add: Price to be paid for buying one share Rs. 120
Total shares (3 shares) Rs. 600

▪ Average price of one share: Rs. 600 / 3 = Rs. 200

▪ Value of the right = Market value – Average price , Rs. 240 – Rs. 200
▪ Value of right = Rs. 40
▪ OR Value of Right = No. of New Shares/ Total No. of all Shares (Market Price – Issue Price of new share)
= (1/ 3) *(240-120) = 40
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Recent Rights Issue of PVR (July –Aug 2020)
Announcement Date Record Date Rights Date Ratio Premium Remarks
06-Jul-20 10-Jul-20 09-Jul-20 7 : 94 774 7:94 Rights Issue of Equity Shares

▪ PVR's rights issue, which had closed on July 31 ‘2020, garnered Rs 672 crore for 85 lakh
shares. The offer size was Rs 300 crore, or about 38 lakh shares, at an issue price of Rs
784.
▪ Nitin Sood, CFO, PVR, said, “The proceeds will be essentially used for meeting working
capital needs (like cinema maintenance, electricity) and partly for debt repayment
obligations. We have approximately Rs 150 crore of debt repayments due in FY21.“
▪ Following the share allotment, the paid-up equity share capital of the company has
increased to Rs 55.17 crore consisting of 5.51 crore fully paid-up equity shares of Rs 10
each. On June 8 ‘2020, the board of PVR approved issue of equity shares of face value
of Rs 10 each by way of a rights issue to the eligible equity shareholders of the company
for an amount aggregating up to Rs 29,979.16 lakh.
▪ PVR's Rs 300 crore rights issue was oversubscribed 2.24 times
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 Program : MBA Tech. Sem:IX
Course : Investment Banking
Module Code : MBAB09004

Thank You

Prepared by Amit Kamkhalia

24
 UNIT 5

Rights Issue and Valuation

Program : MBA Tech. Sem:IX
Course : Investment Banking
Module Code : MBAB09004 IB
Prepared by Amit Kamkhalia MBA/MMS Finance JBIMS 2002
UNIT 5
Valuation of Right Issue.
Primary market: Procedural aspects and Due diligence of prospectus or
letter of offer, Pre-issue decision making and management. Underwriting
obligation to the underwriters in case of under-subscription.
Security Exchange Board Of India (SEBI) guidelines for public issues,
Security laws / regulatory framework for governing Indian capital markets.
Reading: Subramanyam, P.G. (2011). Investment Banking. New Delhi, Tata
Mc Graw Hill. Chapter 3.
CO - : 2

2
Why Rights Issue ?
▪ Cash-strapped companies can turn to rights issues to raise money
when they really need it. In these rights offerings, companies grant
shareholders the right, but not the obligation, to buy new shares at
a discount to the current trading price.
▪ Many times companies issue Rights to raise growth capital for
expansion and reward their exiting share holders

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What are Rights Issue ?
▪ A rights issue is an invitation to existing shareholders to purchase additional new shares in the
company. This type of issue gives existing shareholders securities called rights. With the rights,
the shareholder can purchase new shares at a discount to the market price on a stated future
date. The company is giving shareholders a chance to increase their exposure to the stock at a
discount price.
▪ A rights issue is one way for a cash-strapped company to raise capital often to pay down debt.
▪ Shareholders can buy new shares at a discount for a certain period.
▪ With a rights issue, because more shares are issued to the market, the stock price is diluted and
will likely go down.
▪ Until the date at which the new shares can be purchased, shareholders may trade the rights on
the market the same way that they would trade ordinary shares. The rights issued to a
shareholder have value, thus compensating current shareholders for the future dilution of their
existing shares' value. Dilution occurs because a rights offering spreads a company’s net profit
over a larger number of shares. Thus, the company’s earnings per share, or EPS, decreases as
the allocated earnings result in share dilution.

4
Rights Entitlement (RE) issued under Rights Issue Process in terms of SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2018
Rights Entitlement (RE) is the rights issued by the company to the existing shareholders to subscribe to the
new shares / other securities that the shareholder of a company is eligible to apply for under the rights offer.
REs are offered to shareholders based on a ratio of existing equity shares held as on the record date
Eligible Equity Shareholder can:
i. apply for their Rights Equity Shares to the full extent of their Rights Entitlements;
or
ii. apply for their Rights Equity Shares to the full extent of their Rights Entitlements
and apply for additional Rights Equity Shares; or
iii. apply for their Rights Equity Shares to the extent of a part of their Rights
Entitlements (without renouncing the other part); or
iv. apply for Rights Equity Shares to the extent of a part of their Rights Entitlements
and renounce a part / rest of their Rights Entitlements; or
v. renounce their Rights Entitlements in full
Note :Rights Entitlements (REs) which are neither subscribed nor renounced on or before the Issue Closing
Date shall lapse and shall be extinguished after the Issue Closing Date

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What is the process of on market and off market renunciation?

▪ On Market Renunciation
The Investors may renounce the Rights Entitlements, credited to their respective
demat accounts by trading/selling them on the secondary market platform
of the Stock Exchanges through a registered stock broker in the same manner
as trading / selling Equity Shares of the Company.
▪ Off Market Renunciation
The Investors may renounce the Rights Entitlements, credited to their respective
demat accounts by way of an off-market transfer through a depository
participant. The Rights Entitlements can be transferred in dematerialised form
only. Eligible Equity Shareholders are requested to ensure that renunciation
through off-market transfer is completed in such a manner that the Rights
Entitlements are credited to the demat account of the Renounces on or prior to
the Issue Closing Date.
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Pricing By Companies Issuing Securities
The companies eligible to make public issue can freely price their equity shares or any security convertible at
later date into equity shares in the following cases:
▪ Public / Rights Issue by Listed Companies A listed company whose equity shares are listed on a stock
exchange, may freely price its equity shares and any security convertible into equity at a later date,
offered through a public or rights issue.
▪ Public Issue by Unlisted Companies An unlisted company eligible to make a public issue and desirous of
getting its securities listed on a recognized stock exchange pursuant to a public issue, may freely price its
equity shares or any securities convertible at a later date into equity shares.
▪ Infrastructure company An eligible infrastructure company shall be free to price its equity shares subject
to the compliance with the disclosure norms as specified by SEBI from time to time.
▪ Initial public Issue by Banks The banks (whether public sector or private sector) may freely price their issue
of equity shares or any securities convertible at a later date into equity share subject to approval by the
Reserve Bank of India.
▪ Differential Pricing Any unlisted company or a listed company making a public issue of equity shares or
securities convertible at a later date into equity shares, may issue such securities to applicants in the firm
allotment category at a price different from the price at which the net offer to the public is made
provided that the price at which the security is being offered to the applicants in firm allotment category
is higher than the price at which securities are offered to public.

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Pricing By Companies Issuing Securities -Price Band
Issuer company can mention a price band of 20% (cap in the price band should not be more
than 20% of the floor price) in the offer documents filed with the Board and actual price can be
determined at a later date before filing of the offer document with ROCs.
▪ If the Board of Directors has been authorized to determine the offer price within a specified
price band such price shall be determined by a Resolution to be passed by the Board of
Directors.
▪ The Lead Merchant Bankers shall ensure that in case of the listed companies, a 48 hours notice
of the meeting of the Board of Directors for passing resolution for determination of price is
given to the regional Stock Exchange.
▪ The final offer document, shall contain only one price and one set of financial projections, if
applicable.

Payment of Discounts / Commissions, etc;

No payment, direct or indirect in the nature of a discount, commission, allowance or otherwise
shall be made either by the issuer company or the promoters in any public issue, to the persons
who have received firm allotment in such public issue.

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Freedom to determine the denomination of shares for public /
rights issues and to change the standard denomination
An eligible company shall be free to make public or rights issue of equity shares in any denomination determined by it in
accordance with sub-section (4) of section 13 of the Companies Act, 1956 and in compliance with the norms as specified by
SEBI in circular no.SMDRP/POLICY/CIR-16/99 dated June 14, 1999 and other norms as may be specified by SEBI from time to
time.
The companies which have already issued shares in the denomination of Rs.10/- or Rs.100/- may change the standard
denomination of the shares by splitting or consolidating the existing shares.
The companies proposing to issue shares in any denomination or changing the standard denomination in terms of clause
above shall comply with the following:
a. the shares shall not be issued in the denomination of decimal of a rupee;
b. the denomination of the existing shares shall not be altered to a denomination of decimal of a rupee;
c. at any given time there shall be only one denomination for the shares of the company;
d. the companies seeking to change the standard denomination may do so after amending the Memorandum and
Articles of Association, if required;
e. the company shall adhere to the disclosure and accounting norms specified by SEBI from time to time.
Self Reading article on new amendments in 2020 by SEBI for Rights Issues
https://www.mondaq.com/india/shareholders/993386/sebi-amends-norms-governing-rights-issues-rationalising-eligibility-
disclosures-and-other-concepts 9
SEBI Securities and Exchange Board of India
The Securities and Exchange Board of India was established by the Government
of India on 12 April 1988 as an interim administrative body to promote orderly
and healthy growth of securities market and for investor protection.
It was to function under the overall administrative control of the Ministry of
Finance of the Government of India. The SEBI was given a statutory status on
30 January 1992 through an ordinance. The ordinance was later replaced by an
Act of Parliament known as the Securities and Exchange Board of India Act, 1992.

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Reasons for the Establishment of SEBI
The capital market has witnessed a tremendous growth during 1980’s, characterized
particularly by the increasing participation of the public. This ever expanding investors
population and market capitalization led to a variety of malpractices on the part of
companies, brokers, merchant bankers, investment consultants and others involved in
the securities market. The glaring examples of these malpractices include existence of
self – styled merchant bankers unofficial private placements, rigging of prices,
unofficial premium on new issues, non-adherence of provisions of the Companies Act,
violation of rules and regulations of stock exchanges and listing requirements, delay in
delivery of shares etc. These malpractices and unfair trading practices have eroded
investor confidence and multiplied investor grievances.
The Government and the stock exchanges were rather helpless in redressing the
investor ’s problems because of lack of proper penal provisions in the existing
legislation. In view of the above, the Government of India decided to set-up a
separate regulatory body known as Securities and Exchange Board of India.

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Objectives of SEBI
The overall objective of SEBI is to protect the interests of investors and to promote the
development of, and regulate the securities market. This may be elaborated as follows:
1. To regulate stock exchanges and the securities industry to promote their orderly functioning.
2. To protect the rights and interests of investors, particularly individual investors and to guide
and educate them.
3. To prevent trading malpractices and achieve a balance between self regulation by the
securities industry and its statutory regulation.
4. To regulate and develop a code of conduct and fair practices by intermediaries like brokers,
merchant bankers etc., with a view to making them competitive and professional.

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Purpose and Role of SEBI
The basic purpose of SEBI is to create an environment to facilitate efficient
mobilization and allocation of resources through the securities markets. It also aims to
stimulate competition and encourage innovation. This environment includes rules and
regulations, institutions and their interrelationships, instruments, practices, infrastructure
and policy framework. This environment aims at meeting the needs of the three
groups which basically constitute the market, viz, the issuers of securities
(Companies), the investors and the market intermediaries.
▪ To the issuers, it aims to provide a market place in which they can confidently look
forward to raising finances they need in an easy, fair and efficient manner.
▪ To the investors, it should provide protection of their rights and interests through
adequate, accurate and authentic information and disclosure of information on a
continuous basis
▪ To the intermediaries, it should offer a competitive, professionalized and expanding
market with adequate and efficient infrastructure so that they are able to render
better service to the investors and issuers

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What Is a Primary Market?
▪ A primary market is a source of new
securities. Often on an exchange, it's
where companies, governments, and
other groups go to obtain financing
through debt-based or equity-based
securities. Primary markets are facilitated
by underwriting groups consisting of
investment banks that set a beginning
price range for a given security and
oversee its sale to investors.
▪ Once the initial sale is complete, further
trading is conducted on the secondary
market, where the bulk of exchange
trading occurs each day.

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Types of Primary Issues Equity
• IPO
• FPO
• Private Placements
• Rights Issue
• ESOP
• Preferred allotment

15
Features of Primary Market
▪ The securities are issued by the company directly to the investors.

▪ The company receives the money and issues new securities to the investors.

▪ The primary markets are used by companies for the purpose of setting up new ventures/
business or for expanding or modernizing the existing business

▪ Primary market performs the crucial function of facilitating capital formation in the
economy

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Preparation and Filing of Offer Document
▪ A company wanting to raise capital from the public is required to prepare an offer document giving sufficient information and
disclosures, which enables (potential) investors to make an informed decision. Accordingly, the offer document is required to contain
details about the company, its promoters, the project, financial details, objects of raising the money, terms of the issue et c. ‘How to read
the offer document’ is dealt in the section ‘How to apply in public issue’.
▪ The issuer company engages a SEBI registered merchant banker to prepare the offer document. Besides, due diligence in preparing the
offer document, the merchant banker is also responsible for ensuring legal compliance. The merchant banker facilitates the issue in
reaching the prospective investors (marketing the issue).
▪ The draft offer document thus prepared is filed with SEBI and is made available on SEBI’s website
(http://www.sebi.gov.in/SectIndex.jsp?sub_sec_id=70) along with its status of processing (http://www.sebi.gov.in/PMDData.html ).
Company is also required to make a public announcement about the filing English, Hindi and in regional language newspapers. In case,
investors notice any wrong / incomplete / lack of information in the offer document, they may send their representation / com plaint to
the merchant banker and / or to SEBI.
▪ The Indian regulatory framework is based on a disclosure regime. SEBI reviews the draft offer document and may issue observations on
the draft offer document with a view to ensure that adequate disclosures are made by the issuer company/merchant bankers in t he
offer document to enable the investor to make an informed investment decision in the issue. It must be clearly understood that SEBI
does not “vet” and “approve” the offer document.
▪ SEBI’s observations on the draft offer document are forwarded to the merchant banker, who incorporates the necessary changes and
files the final offer document with SEBI, Registrar of Companies (ROC) and stock exchange(s). This is made available on websi tes of the
merchant banker, stock exchange(s) and SEBI.

17
Opening of the Issue
▪ After completing legal formalities, the issuer company issues advertisements in
English, Hindi and regional language news papers and the issue is open to
public for subscription.
▪ If the prospective investor is interested in subscribing to the shares of the
issuer company based on what is disclosed in the offer document, he can
apply for its shares (or debentures) before the issue closes, by duly filling up
the application form and making the payment. ‘How to apply invest in (public)
issues’, is covered separately
▪ The entire back office operation of the public issue, including processing of
application forms, despatch of refunds, allotment of securities, is handled by
the Registrar to the Issue (RTI) on behalf of the issuer company.
▪ It is to be noted that only one application per PAN is allowed in any issue. If
investor makes more than one application, all the applications are liable to be
rejected. The RTI matches applicant’s name in the application form and verifies it
against the PAN, demat account details (DP ID and Demat A/c No) and also
weeds out duplicate applications

18
Allotment and Listing
▪ The issue then closes (investor cannot apply beyond the closing date) and the shares
are allotted to the applicants proportionally or on lottery basis, if there is
oversubscription. The merchant banker and RTI finalize the ‘basis of allotment’.
▪ This is approved by the stock exchange officials and the basis of allotment is made
available in the website of the RTI. The issuer company issues advertisements in English,
Hindi and regional language news papers about the issue price and basis of allotment.
▪ Upon allotment, investor will receive demat credit within 12 days. The despatch of refund
cheques, instructions for unblocking amount in bank account (for ASBA) and
instructions for electronic credits of refund money, is given by the RTI within 12 days of
the close of the issue.
▪ The shares of the company are then listed on the stock exchange within 12 working
days of the close of the issue. Listing of shares (or debentures) in stock exchange enables the
investor to buy securities from or sell securities to other investors (secondary market).
▪ The complete contact details of all the intermediaries involved in an issue namely merchant
banker, RTI, banker to the issue etc. are available in the offer document. In case the investor
needs any clarification they can contact them.

19
Different types of issues
Public issue: When a company raises funds by selling (issuing) its shares (or debenture / bonds) to the public through issue of offer document
(prospectus), it is called a public issue.
1) Initial Public Offer: When a (unlisted) company makes a public issue for the first time and gets its shares listed on stock exchange, the public issue is
called as initial public offer (IPO).
2) Further public offer: When a listed company makes another public issue to raise capital, it is called further public / follow-on offer (FPO).
Offer for sale: Institutional investors like venture funds, private equity funds etc., invest in unlisted company when it is very small or at an early stage.
Subsequently, when the company becomes large, these investors sell their shares to the public, through issue of offer document and the company’s
shares are listed in stock
exchange. This is called as offer for sale. The proceeds of this issue go the existing investors and not to the company.
Issue of Indian Depository Receipts (IDR): A foreign company which is listed in stock exchange abroad can raise money from Indian investors by selling
(issuing) shares. These shares are held in trust by a foreign custodian bank against which a domestic custodian bank issues an instrument called Indian
depository receipts (IDR), denominated in `. IDR can be traded in stock exchange like any other shares and the holder is entitled to rights of ownership
including receiving dividend.
Others:
1) Rights issue (RI): When a company raises funds from its existing shareholders by selling (issuing) them new s hares / debentures, it is called as
rights issue. The offer document for a rights issue is called as the Letter of Offer and the issue is kept open for 30-60 days. Existing shareholders are
entitled to apply for new shares in proportion to the number of shares already held. Illustratively, in a r ights issue of 1:5 ratio, the
investors have the right to subscribe to one (new) share of the company for every 5 shares held by the investor.
2) In a Bonus Issue, the company issues new shares to its existing shareholders. As the new shares are issued out of the company’s
reserves (accumulated profits), shareholders need not pay any money to the company for receiving the new shares.The net worth (owner ’s
money) of a company consist of its equity capital and its reserves. After a bonus issue, there is an incre ase in the equity capital of the
company with a corresponding decrease in the reserves, while the net worth remains constant

20
Pricing of IPO
The company can initiate pricing of IPO either through Fixed Price IPO or by
Book Building Offering.
▪ In the case of Fixed Price Offering, the price of the company’s stocks is
announced in advance.
▪ In the event of Book Building Offering, a price range of 20% is announced,
following which investors can place their bids within the price bracket. For the
bidding process, the investors have to place their bids as per the company’s
quoted Lot price, which is the minimum number of shares to be purchased.
Alongside, the company also provides for IPO Floor Price, which is the
minimum bid price and IPO Cap Price, which is the highest bidding price. The
booking is typically open from three to five working days and investors can
avail the opportunity of revising their bids within the stipulated time. After
completion of the bidding process, the company will determine the Cut-Off
price, which is the final price at which the issue will be sold.

21
Significance of Indian and Global capital markets

22
Green Shoe Option
Green Shoe option (GSO) is a price
stabilization mechanism which is used in
case of listing of Initial Public offer (IPO) or
further public offer within first 30 days from
the day of listing.

The aim of this scheme is to provide price

support in case prices falls below issue
prices. Under this scheme upto 15%
overallotment of securities is made after
borrowing the same from promoters and if
the prices falls after listing of shares then the
shares are bought back from the market to
create demand for the shares which provides
price support.

23
The prices of shares on 1st 30 days are as below: The purpose of Green shoe option is to
Eg Issue Size 100000 Shares of Rs10 at Rs 90 ,20 % to Promoters and 80% provide price support in case price falls
to Public ,GSO 15% of Total Issue below issue price (i.e Rs 90 in given
case). Hence GSO will not be applied in
case price is above Rs 90.
On 5th and 10th day price is below Rs 90
and hence green shoe option will be
exercised. Say on 5th day stabilizing
agent purchases 2,000 shares @ Rs 88
and on 10th day stabilizing agent
purchases 5,000 shares @ Rs 84. The
above action will create demand for the
shares and will provide price support to
shares.
Now after 30 days are over, stabilizing
agent need to return 15,000 shares to
promoters / existing shareholders.
However he has only 7,000 shares (i.e
2,000 + 5,000). In the given case the
shortfall of 8,000 shares will be met by
further issued of shares by the company
to the stabilizing agent @ Rs 90 and
stabilizing agent will return all 15,000
shares to promoters / existing
* Assume over subscribed 95000 shares instead of 80000 shares (80% offered ) shareholders. 24
Meaning and Nature of Underwriting
• Underwriting in the context of a company means undertaking a responsibility or giving a
guarantee that the securities (shares and debentures) offered to the public will be subscribed
for. The firms which undertake the guarantee are called ‘underwriters’. Underwriting is similar
to insurance in the sense that it provides protection to the issuing company against the failure
of an issue of capital to the public.

• It ensures success of new issues of capital and if the shares or debentures are not subscribed
by the public. Wholly, the underwriters will have to take them up and pay for them.
Underwriting is, therefore, an act of undertaking the guarantee by an underwriter of buying
the shares or debentures placed before the public in the event of non- subscription

25
Meaning and Nature of Underwriting
▪ According to SEBI Rules 1993, underwriting means an agreement with or without conditions to subscribe
to the securities of a body corporate when the existing shareholders of such body corporate or the public
do not subscribe to the securities offered to them. ‘Underwriter’ means a person who engages in the
business of underwriting of an issue of securities of a body corporate.
▪ The underwriters, for providing this service to the issuing companies charge a commission generally
calculated at an agreed specified rate on the issue price of whole of the shares or debentures under
written. Such a commission is called underwriting commission which is payable on the whole of shares or
debentures underwritten even if the public takes up all the shares or debentures offered.
▪ The issuing company has, thus, to enter into an agreement with one or more underwriter/s who may be
either an individual, a firm, bank or some financial institution.

▪ In an English case, the learned Judge defined underwriting as “an agreement entered into before the
shares are brought before the public that in the event of the public not taking up the whole of them or
the number mentioned in the agreement, the underwriter will, for an agreed commission take an
allotment of such part of the shares as the public has not applied for”.
▪ In India, the Companies Act, 1956 limits the underwriting commission on issue of shares at 5% of the issue
price of shares and in case of debentures at 2½% of the issue price of debentures.

26
Forms of Underwriting
1. Full Underwriting: It is an agreement under which the underwriter undertakes the guarantee of buying the whole of shares or debentures placed
before the public in the event of non-subscription. The liability of the underwriter is to buy and pay for the entire unsubscribed portion of the issue.
2. Partial Underwriting: Under this type of agreement, the underwriter undertakes the guarantee for only part of the issue offered to the public and
his liability is limited to the extent of unsubscribed portion of the issue underwritten by him.
3. Joint Underwriting: In case of a large issue which is unmanageable by a single underwriter and where the risk involved is too high, the issuing
company may enter into underwriting agreement with more than one underwriter. Each underwriter undertakes the guarantee for the issue of a
certain portion of the whole issue offered to the public. Thus, underwriters share the risk involved in the ratio of the number of shares or debentures
underwritten by them. Sometimes the promoters of issuing company prefer joint underwriting from underwriters operating in different regions of the
country so as to diffuse the issue over a number of investors scattered all over the country and retain control over management of the company.
4. Syndicate Underwriting: Under this type of underwriting, a number of underwriting firms enter into an agreement among themselves to undertake
the guarantee of buying shares or debentures of a large issue offered to the public involving huge funds and risk. Syndicate underwriting is essentially
different from joint underwriting so far as the agreement among the underwriters is concerned. Thus, in syndicate underwriting two types of separate
agreements take place, one between the issuing company and the syndicate of underwriters, and the other among the underwriters who are
members of the syndicate.
5. Firm Underwriting: When an underwriter undertakes to buy or subscribe a certain number of shares or debentures irrespective of the subscription
from the public, it is called firm underwriting. The liability of underwriters in case of firm underwriting is both for shares underwritten as well as such
part of the shares as the public has not applied for. Firm underwriting generates confidence among investors and increases the chances of success of
the issue.
6. Sub-Underwriting: Sometimes, the underwriter enters into agreement with some other underwriters to undertake guarantee for the issue of whole
or part of the issue underwritten by him. Such an agreement between the underwriter and the other underwriters (called sub-underwriters) is known
as sub-underwriting. The sub-underwriters have no agreement with the issuing company and work under the main underwriter who pays them some
commission out of his underwriting commission.
7. Outright Purchases of Issues: In all the six forms of underwriting agreements discussed above, the underwriters provide the ser vices on commission
basis. However, in some cases the underwriters, instead of undertaking guarantee to buy shares or debentures not subscribed by the public, may
enter into an agreement to out-rightly purchase the issue (shares or debentures) at an agreed price and arrange to sell the same latter through their
own arrangements. 27
The importance of underwriting
1. Assurance of Adequate Finance: Underwriting is an act of undertaking guarantee by an underwriter to buy and pay for
the shares or debentures placed before the public in the event of their non-subscription. Thus, through underwriting, an
issuing company is assured of procuring the required funds from the issue of shares or debentures. In the event of non-
subscription by the public, underwriters purchase the unsubscribed part of the issue and provide finance to the company.
2. Supplying Valuable Information to Companies: In addition to the protection of risk of the issuing companies with regard
to the success of the issue, the underwriters supply valuable information in regard to capital market conditions, general
response of the investors, etc. to the issuing companies. These companies are, usually, benefited from the expert-advice of
the underwriters.
3. Distribution of Securities: After purchasing securities, underwriters distribute the same to the real investors. The
underwriters, through agents and others diffuse the issue over a large number of investors scattered in different part of the
country. Thus, underwriting helps promoters to retain control over the management of the company.
4. Increase in Goodwill of the Issuing Company: The underwriting of capital issues by prestigious institutions generates
confidence among investors and improves their response to the issues. Investors in advanced countries are influenced more
by the prestige of the underwriting agencies than by the prestige of the issuing company. Underwriting, thus, ultimately
increases the goodwill of the issuing company.
5. Service to Prospective Investors: Underwriters provide essential information about the issuing companies to the
prospective investors and also advise them about various issues. They encourage people to save more and direct their
savings in corporate securities. Thus, investors are also benefited through underwriting.
6. Service to the Society: The pace of industrialization of a country depends to a great extent upon the successful flotation
of capital issues. By mobilizing resources and providing adequate finance, underwriters play a very important role in setting
up of new projects, increasing employment, production and per capita income. Thus, it is not only the corporate enterprises
but also the society at large which is benefited by underwriting 28
SEBI’S Guidelines on Underwriting
(a) As per the original Guidelines issued by SEBI on 11.6.1992, underwriting was mandatory for full issue and
minimum requirement of 90% subscription was also mandatory for each issue of capital to public. However,
as per the Revised Guidelines issued by SEBI on 10.10.94, underwriting is not mandatory now and the issuers
have the option of deciding whether the issue is to be underwritten or not. Number of underwriters would
also be decided by the issuers.
(b) If the issue is not underwritten and if the minimum subscription of 90% of the offer to the public is not
received, the entire amount received as subscription would have to be returned in full.
(c) If the issue is underwritten and if the company does not receive 90% of the issued amount from public
subscription plus accepted development from underwriters, within 60 days of the opening of the issue, the
company should refund the amount of subscription. In case of disputed devolvement, the company should
refund the subscription if the above conditions are not met.
(d) The lead manager(s) must satisfy themselves about the net worth of the underwriters and the
outstanding commitment and disclose the same to SEBI. A statement to this effect should be incorporated
in the prospectus.
(e) The underwriting agreement may be filed to SEBI.

29
 Program : MBA Tech. Sem:IX
Course : Investment Banking
Module Code : MBAB09004

Thank You

Prepared by Amit Kamkhalia

30
 UNIT 6

Domestic Issue Management –

Book-building Process and IPO
Program : MBA Tech. Sem:IX
Course : Investment Banking
Module Code : MBAB09004 IB
Prepared by Amit Kamkhalia MBA/MMS Finance JBIMS 2002
UNIT 6
Domestic Issue Management: Pricing of various fund raising
instruments
Net Asset Value method, book-building, book-building through on-
line Initial Public Offering (IPO), reverse book-building
Reading: Subramanyam, P.G. (2011). Investment Banking. New Delhi,
Tata Mc Graw Hill. Chapter 5.
CO - : 2
ISSUER
Pricing Strategy
▪ Quality of demand (Retail, HNI, Institutions)
▪ Price sensitivity
▪ Account by account feedback
▪ Current market conditions
▪ Views of leading investors
▪ Price relative to comparable companies
▪ Likely aftermarket activity
Pricing
▪ Valuation based on Average EPS of Company –
▪ PE Multiple
▪ Compared with companies in similar sector with similar turnover
▪ Discounted Cash Flow Method
▪ Book Value Method
Size of IPO and Dilution
Key Parameters:
▪ Maximum issue size: 5 times of net worth
▪ Minimum Public Shareholding: 25%
▪ Dilution of 10%: Rule 19(2)(b): Rs. 100 Cr Public
▪ Issue, 20 Lacs shares, Book Building
▪ Minimum/Maximum Dilution: Minimum 25%/10% and Maximum upto the comfort level of
promoters (generally below 50%)
▪ Minimum capital for listing at BSE/NSE: Rs. 10 Cr
▪ Feasibility of Project
Case Study
Net Worth : Rs. 20 Cr
Promoters Holding: 100%
Turnover: Rs. 70 Cr
Net Profit: Rs 7 Cr
PE Multiple: 10

Maximum size: ? Maximum size: Rs. 100 Cr

Maximum Price: ? Maximum Price: Rs. 100 (Rs. 10 EPS * 10)
How Many Shares to be issued: ? How Many Shares to be issued: 1 Cr
Equity Valuation
Equity Valuation becomes easy when the script is listed,
Company is active in business & shares are regularly trading.
Since market price is ready available in stock exchange
website. Further we can average out the daily closing market
price of last one year to make it full proof, however it
becomes challenge to value unlisted companies equity
shares or Companies whose shares are not regularly trade.
When valuation is required
▪ Compliance under section 56 (2) (viib) read with rule 11UA allotment of Shares at premium.
▪ Transfer of shares at fair market value under section 52(2) (viia) read with rule 11UA(Note- Rule
11UA prescribed two method of valuation – NAV & DCF)
▪ Allotment of shares to Non Resident & Filing form FC GPR. Gross provisional returns
▪ When Two or More Company Merge or Amalgamate in one & share exchange ratio to find
based on fair value.
▪ Share pledge as security for raising loan & security value to determine.
▪ Purchase & Sales of Business.
▪ Transfer Pricing – Share transfer between Associates.
▪ Determining Business Value at the time of Family Separation.
▪ Other statutory compliances including FEMA Rules.
Methodologies
1. Net Asset Value (NAV) Method NAV
2. Discounted Cash Flow Method DCF
3. Profit or Dividend Yield Method DY
4. PE Ratio Method PE
1. Net Asset Value (NAV) Method
Net Asset represent Net worth of the Company. After reduction of preference share Capital value from net worth of the
Company we get value of company to the Equity share holders. Figures of net assets from last audited balance sheet can
be taken.

Calculation under NAV Method Rs.

a. Total Asset excluding Misc Expenditure & P&L Dr
Balance xxx
b. Less- Total Liability excluding contingent liability -xxx
c. Net Assets Value (a-b) XXX
d. Less- Preference shares value -xxx
e. Value of net assets attributable to Equity Share Holders
(c-d) XXX
f. Number of Equity Shares XX
g. Value of Share (e/f) XXX
1. Net Asset Value (NAV) Method
Example

Calculation under NAV Method Rs.

a. Total Asset excluding Misc Expenditure & P&L Dr
Balance 5,00,00,000
b. Less- Total Liability excluding contingent liability 3,00,00,000
c. Net Assets Value (a-b) 2,00,00,000
d. Less- Preference shares value --
e. Value of net assets attributable to Equity Share Holders
(c-d) 2,00,00,000
f. Number of Equity Shares Say 5,00,000
g. Value of Share (e/f) 40
1. Net Asset Value (NAV) Method
Important Notes –

▪ Value of Assets can be modify from audited figures by taking market value of Properties, Listed
Investments etc.

▪ Rules 11UA of Income tax Rules allows only audited balance sheet figures for valuation of equity
shares by net assets value method, however value of Liability will not include provisions made
for meeting liabilities, other than ascertained liabilities like provision for gratuity & others and
net provision for taxation.

▪ Partly paid up shares should be made equivalent to fully paid up shares by reducing in
numbers in proportion to their lesser paid up amount.
2. Discounted Cash Flow Method (DCF)
▪ Discounted Cash Flow Method (DCF) is a complex calculation however it considers not just
Companies present situation but also take in to figure, future of the Company. DCF also works for
start-up Companies Valuations which do not have track records but has valuation based on business
idea & current resources.

▪ Value of firm derived by discounting future cash flows to the company by expected rate of return of
Equity & Debt holders. Valuation through DCF imbibe expectation of owners & lenders by
considering expected rate of return of both Equity & Debt holders.

▪ DCF becomes more relevant since any decision related to investment is taken considering future
return on it & DCF figures out valuation based on future cash flows of the Company.
2. Discounted Cash Flow Method (DCF)
Process of valuation is as under –
Step 1: Arrive at Projected Profit after Tax
Step 2: Add back non-cash costs i.e. depreciation etc
Step 3: Subtract capital expenditures.
Step 4: Subtract Increases in working capital.
Step 5: Take into account the effect of changes in Debts.
Step 6: Discount the FCFF for each year at the cost of capital.
Step 7: Add the terminal value accruing in the final year.
Step 8: Arrive value of Equity by subtracting debt value.
Step 9: Arrive Value of Equity Share by diving number of shares to value of Equity
2. Discounted Cash Flow Method (DCF)
Cost of Capital can be derived as under –
Equity Share Holders expected rate of return vary from industry to industry
which can be calculated by adding extra return for taking industry specific risk to
market expected rate of return.
Technically its equals to Beta*(Expected Return- Risk free return) + Risk free
Return
Debt Holder expected rate of return would be after tax interest rate on debt.
and cost of capital is derived by weighted averaging the above rates of return as
per total value of Capital & Debt
3. Profit OR Divided Yield Method
Profit after tax or dividend is divided by Normal rate of return to derive Capitalized Value
& the same is divided by number of shares to get value per share.

▪ Capitalize Value = ( Profit / Dividend ) / Normal Rate of Return

▪ Value per Share = Capitalize Value / Number of shares

Generally We take Average profit of 5 years to rule out higher or lower side valuation.

Preference Share Dividend to be subtracted from profit to find profit attributable to

equity share holders.
4. Price-Earnings Ratio Method
This method is generally used to calculate listed Company Share Value. It uses Earning
Per Share (EPS) & Market Price of Share (MPS) to calculate value of share.

PE Ratio is determined as follow- MPS/ EPS

Investor can average out PE Ratio Companies in same sector to rule out higher or lower
side valuation based on one company data.

Value per share – EPS x P/E Ratio

Whenever Company declare its Qrtly results & EPS, Investor by using particular sector
PE Ratio can find Value of Share to take investment decision.
Selection of Method Decision
• Discounted Cash Flow Method & Net Assets Value Method are the most used
methods to value Shares since both method uses wide range of data & capture
lot of figures to derive Value of Share.
• It is always advisable to Value Share by Earning OR Market Based Method i.e.
Discounted Cash Flow Method for Companies in to Manufacturing & Service.
Net Asset Value Method is used by Investment Companies.

Source : https://taxguru.in/income-tax/valuation-equity-share.html
Selection of Method Decision
• Discounted Cash Flow Method & Net Assets Value Method are the most used
methods to value Shares since both method uses wide range of data & capture
lot of figures to derive Value of Share.
• It is always advisable to Value Share by Earning OR Market Based Method i.e.
Discounted Cash Flow Method for Companies in to Manufacturing & Service.
Net Asset Value Method is used by Investment Companies.

Source : https://taxguru.in/income-tax/valuation-equity-share.html
 Program : MBA Tech. Sem:IX
Course : Investment Banking
Module Code : MBAB09004

Thank You

Prepared by Amit Kamkhalia

24
 UNIT
7/8

Basis of Allotment , ETF and

Delisting of shares
Program : MBA Tech. Sem:IX
Course : Investment Banking
Module Code : MBAB09004 IB
Prepared by Amit Kamkhalia MBA/MMS Finance JBIMS 2002
UNIT 7 & 8
7 Domestic Issue Management: Eligibility to issue securities, fixed v/s
book-building process, Exchange Traded Funds its varieties and
guidelines. Basis of allotment of shares. Reading: Subramanyam, P.G.
(2011). Investment Banking. New Delhi, Tata Mc Graw Hill. Chapter 5.
CO - : 2

8 Buy-backs and Delisting: Introduction to share repurchase or Share

buy-back, Delisting of listed companies Reading: Subramanyam, P.G.
(2011). Investment Banking. New Delhi, Tata Mc Graw Hill. Chapter 9.
CO - : 2
Basis of Allotment
• Allotment is the process of allocating shares to shareholders, based on prior agreements, most
commonly seen in an IPO. This allotment of shares is based on conditions which must be
satisfied before the shares are issued.
• After the closure of an issue, the bids that are received from the shareholders are put under
different categories including:
• Firm allotments
• Qualified Institutional Buyers (QIBs),
• Non-Institutional Buyers (NIBs), and many more.
• After classification of the received bids, the oversubscription ratios are then calculated for the
respective groups against the shares reserved for them. The bids are then aggregated
amongst different buckets based on their applied shares. The calculated oversubscription ratio
is then added to the applied shares.
• RII – 35% of the IPO
NII – 15% of the IPO
QIB – 50% of the IPO
• This process is governed by SEBI’s ICDR regulations in India.
Basis of Allotment
• IPO Basis of Allotment is a document published by the registrar of an IPO
after finalizing the share allocation based on regulatory guidelines. This
document provides information about the demand of the IPO stock.
• The IPO allotment information is categorized by the number of shares
applied by investors. For each such category detail bidding information is
provided in this document including the number of valid application
received, the total number of share applied, the ratio of the allotment
and number of shares allocated to the applicants.
• Ratio of the allotment is a critical factor for IPO's oversubscribed multiple
times. This field tells how many applicants will receive a single lot of
shares among a certain number of applicants. For example, ratio 1:8
means only one out of eight applicants received one lot of shares; ratio
value 'FIRM' means all the applicants are eligible to receive a certain
amount of share.
Investor Classification
Pricing- How is the Cut-off Price of IPO decided?

• The cut off price of the IPO is decided after considering the book
and analyzing the market’s response to the stock. The decision is
taken by the company and the book running lead managers
(BRLMs).
ETF
• Exchange traded funds, or ETFs, were first developed in the 1990s as a way to provide access to passive,
indexed funds to individual investors.
• According to Gary Gastineau, author of "The Exchange-Traded Funds Manual," the first real attempt at
something like an ETF was the launch of Index Participation Shares for the S&P 500 in 1989. Unfortunately,
while there was quite a bit of investor interest, a federal court in Chicago ruled that the fund worked like
futures contracts, even though they were marginalized and collateralized like a stock; consequently, if
they were to be traded, they had to be traded on a futures exchange, and the advent of true ETFs had to
wait a bit.
• The next attempt at the creation of the modern Exchange Traded Fund was launched by the Toronto
Stock Exchange in 1990 and called Toronto 35 Index Participation Units (TIPs 35). These were a warehouse,
receipt-based instrument that tracked the TSE-35 Index.
• Three years later, the State Street Global Investors released the S&P 500 Trust ETF (called the SPDR or
"spider" for short) on January 22, 1993. It was very popular, and it is still one of the most actively-traded
ETFs today. Although the first American ETF launched in 1993, it took 15 more years to see the first
actively-managed ETF reach the market.
• Since their inception, the ETF market has grown enormously and are now used by all types of investor
and trader around the world.
• ETFs now represent everything from broad market indices to niche sectors or alternative asset classes.
ETFs in India
• Benchmark Mutual Fund were the pioneers to introduce ETFs in India. In 2001, India witnessed its first ETF – the Nifty
Benchmark Exchange-Traded Scheme (Nifty BeES) launched by the Benchmark Mutual Fund. It got listed on the NSE and
tracked the Nifty 50 Index. Nifty BeES was a revolutionary avenue at that time in the sense that with a single effort
investors could gain exposure to the whole index and maintain a diversified portfolio without any active fund manager.
• Then came the first debt ETF in 2004 by the name Liquid BeES- a fixed income ETF launched by Benchmark Mutual Fund
that addressed the investment needs of conservative investors and gave them access to the money market. Soon after
that, in 2007, the AMC introduced the first gold ETF called Gold BeEs.
• The popularity of Gold ETFs surged extensively between 2008 and 2013. The global credit crisis of 2008 made individuals
look for safer havens and gold being a safe asset, a lot of money moved into gold ETFs. In fact, for the period 2009-14,
more than half of the total ETF assets were parked in gold funds.
• However, the first major boost for ETFs was noticed soon after the ETFs were recognized as an eligible asset class for the
pension funds in the budget of 2013. Additionally, the securities transaction taxes were lowered to offer ETFs a level-
playing field with mutual funds.
• In 2014, the government’s efforts to divest its share in public sector enterprises via the ETF route also led to the spread of
awareness about ETFs and gave way to the launch of the CPSE ETF (Central Public Sector Enterprise Exchange Traded
Fund). With this, the government was able to raise Rs 3000 crores of disinvestment proceeds.
Tracking Error
• Tracking error is a measure of financial performance that determines the difference
between the return fluctuations of an investment portfolio and the return fluctuations
of a chosen benchmark. The return fluctuations are primarily measured by standard
deviations.
• Generally, a benchmark is a diversified market index that represents part of the total
market. The most common benchmarks for equity portfolios are SENSEX and Nifty 50
• Tracking error is one of the most important measures used to assess the performance
of a portfolio, as well as the ability of a portfolio manager to generate excessive
returns and beat the market or the benchmark. Due to the abovementioned reasons, it
is used as an input to calculate the information Ratio (The information ratio measures
the risk-adjusted returns of a financial asset or portfolio relative to a certain
benchmark. This ratio aims to show excess returns relative to the benchmark, as well as
the consistency in generating the excess returns. The consistency of generating excess
returns is measured by the tracking error.)
• Tracking error is frequently categorized by the way it is calculated. A realized (also
known as “ex post”) tracking error is calculated using historical returns. A tracking error
whose calculations are based on some forecasting model is called an “ex ante” tracking
error.
Calculating Tracking Error
Delisting of Shares
The term "delisting" of securities means removal of
securities of a listed company from a stock exchange. As
a consequence of delisting, the securities of that
company would no longer be traded at that stock
exchange
When valuation is required
▪ In voluntary delisting, a company decides on its own to remove its securities from a
stock exchange whereas in compulsory delisting, the securities of a company are
removed from a stock exchange as a penal measure for not making
submissions/complying with various requirements set out in the Listing agreement within
the time frames prescribed
▪ SEBI (Delisting of Securities) Regulations, 2009 provide an exit mechanism to the
existing shareholders in the following manner: Voluntary delisting whereby the exit price
is determined through the Reverse Book Building process- The floor price is calculated
in accordance with the regulations and the shareholders have to make a bid at a price
either on or above the floor price. The exit price would be decided on the basis of
bidding by the public shareholders. If the exit price so determined is acceptable to the
promoter, the promoter pays that price to the investors and the investors can exit. Those
investors who do not participate in the Reverse Book Building process have an option
to offer their shares for sale to the promoters. The promoters are under an obligation
to accept the shares at the same exit price. This facility is usually available for a
period of at least one year from the date of closure of the delisting process.
Reverse Bookbuilding
Selection of Method Decision
• Discounted Cash Flow Method & Net Assets Value Method are the most used
methods to value Shares since both method uses wide range of data & capture
lot of figures to derive Value of Share.
• It is always advisable to Value Share by Earning OR Market Based Method i.e.
Discounted Cash Flow Method for Companies in to Manufacturing & Service.
Net Asset Value Method is used by Investment Companies.

Source : https://taxguru.in/income-tax/valuation-equity-share.html
 Program : MBA Tech. Sem:IX
Course : Investment Banking
Module Code : MBAB09004

Thank You

Prepared by Amit Kamkhalia

16
Private Placement - Intro
A private placement is a sale of either stocks, bonds or securities to a
(or group of) selected private investor, rather than offering it to the
public.
▪ The investors concerned can be either banks, mutual funds,
pension funds or insurance companies.
▪ The offer of securities or invitation to subscribe securities,
shall be made to not more than 50 persons in a single offer or
not more than 200 persons in the aggregate in a financial year
(excluding qualified institutional buyers and employees of the
company being offered securities under ESOP).
▪ This restriction would be read for all the securities combined
together in a Financial Year.
▪ Restriction is reckoned individually for each kind of security
that is equity share, preference share or debenture
• Prohibition on any public advertisements or announcement on any
media to inform the public at large about such an offer.
• Private placement can be done for any amount (no minimum value
criterion
Private Placement - Process
Private Placement- Pros and Cons
Privacy and control
Discretion is of utmost importance to many companies and investors. Private placements do not have
to go through public filing or disclosures.
Longer maturities
For companies that wish to extend their refinancing obligations past the typical three to five years,
private placement transactions can be ideal. They offer much longer maturities than most other
financing arrangements.
No fluctuating interest rates
Private placements have less interest rate risk, as companies generally offer them at a fixed rate. This
grants much-needed reassurance in the event of rising interest rates.
Lower cost
Between regulatory issues, legal documentation, underwriting expenses and bank fees, issuing a public
offering can quickly become expensive. Companies can have a much lower all-in cost when issuing
private placements.
Lower turnaround time
Because private placements do not have to go through the bureaucracy-filled regulation process,
issuing them is much faster compared to public bonds.

Dis-advantage:
• Suitable investors may be difficult to locate, for example, and may have limited funds to invest.
• In addition, privately placed securities are often sold at a deep discount below their market value.
Companies that undertake a private placement may also have to relinquish more equity, because
investors want compensation for taking a greater risk and assuming an illiquid position.
• Finally, it can be difficult to arrange private placement offerings in multiple states.
Private Placement vis-à-vis preferential issue
Preferential issues are those that are made to select investors on
preferential basis to the exclusion of everyone else. The act of
allotting shares on preferential basis is referred to as ‘Preferential
Allotment’.
Private Placements are defined as ‘issues made to investors
numbering less than 200’. All private placements are executed
through preferential allotments.
The terms ‘preferential issue’ and ‘private placement’ are
sometimes used interchangeably though they have a subtle
distinction. Preferential issues are generally made to promoters,
persons belonging to the promoter group, collaborators, joint
venture partners, financial and strategic investors. Private
placements on the other hand, are made to institutional and non-
institutional investors.
Preferential Issues in listed companies are known as PIPEs
(Private Investment in Public Equity).
Those private placements that are made exclusively to QIBs
under SEBI regulations are known as Qualified Institutional
Placements or QIPs . Investment bankers are mandatory in QIPs
but not in PIPEs.
Private Equity - Introduction

PE PE Firm
investor (fund)
• Partnership firm (LLP)
• High net worth
• Limited partner
investor
• General partner
Forms
• Venture Capital
• Buyout
• Leveraged buyout
• Management buyout
• Institutional funds and accredited investors usually make up the
primary sources of private equity funds, as they can provide
substantial capital for extended periods of time.
• A team of investment professionals from a particular PE firm raises
and manages the funds.
Portfolio
company
• Private entity
(generally)
• Public entity (covert
into Pvt)
P/E create value:
• Re-engineer process
and bring operational
efficiency
• Raise debt at
favourable terms
• Align mgmt and owner
interest
Private Equity – Structure
A. Structure
i. Partnership – Limited
a) Limited partners – Contribute capital, limited liability
a) Specified high net worth investor only
b) Return of capital and returns over that (profits)
b) General Partners: Manage funds, bear unlimited
liability
a) Management fee (funds invested): ~ 2%
b) Performance fee/carried interest (variable on
profit/loss) : ~ 20%
ii. Company limited by shares; Typically closed ended
(exit)

B. Generally, Fund raising period : 1-2 years; Investment period

– 10-12 years (with extension 2-3 year)
Valuation – Portfolio companies – Exiting method
I. Initial Public Offering (IPO)
▪ Most value creation and sought after
II. Secondary Market sale
▪ Sale to other investor or entity
▪ Second most value additive way (strategic sale
implies sale to another entity in same
industry)
III. Management Buyout
• Mgmt will have strong interest
• High debt may restrict flexibility
IV. Liquidation
Timing of exit is paramount – determine returns
Private Equity – Business Model/Investment Stage
STAGE Underlying Companies (Portfolio companies)

VC STAGE Companies are generally cash negative, There is rapid growth expectation and increasing
investment requirements. PE investor perceives higher risk with higher return possibilities.
Early investors expect valuation increases in subsequent rounds.

PE STAGE Business model is stabilised, cash positive operations, funds required for reaching optimum
level of operations to maintain the gains achieved. PE investor perceives moderate risk and
return possibility. Investors expect to exit in IPO with substantial gains. If IPO is delayed, a
buyback may be considered as an exit route in a pre-negotiated formula.
PIPEs Company is listed and has a position of reckoning. Funds are raised from PE investors since
public equity markets are subdued. PE investors expect upside when the markets turnaround.
Exit is generally through the market.
M&A PE investor investing in secondary shares with less than 25% control. Exit is generally through
(MINORITY strategic sale / secondary sale / buyback. No Takeover Code is involved if not acting in concert.
STAKES)
BUYOUT (WITH Minimum stake acquired is 51-60%. In closely held companies, 100% acquistions are also done,
TRANSFER OF usually along with retirement of existing debt. In listed companies, buyout may entail de-listing.
CONTROL) Exit is generally through strategic sale or IPO.

Distressed Buying entities under stress, turning them around and exiting.
Asset
Valuation – Portfolio companies
I. Discounted Cash flow : entity having significant
operating history
• Use of Pure play method for deriving Beta etc
II. Relative Value or Market Approach: require
predicable cash flows and history of operations
• Difficult to get comparatives of private entities
III. Real Option : Value without option + Value of real
option (entities with flexibility in strategies)
IV. Replacement cost : Cost of starting business from
scratch + value added over the years
• Value addition is hard to estimate
V. Leverage Buyout method – explained in details
VI. Venture Capital Method - explained in details
Valuation – Portfolio companies (Leveraged Buyout method)
I. Rather than valuing model, its more of method
of assessing impact of capital structure changes
II. Objective to determine maximum price of
company, while investing
I. Start from Exit price – Reverse valuation

Exit Value = Investment + Earnings + Debt

cost growth & reduction
change in
price
multiple
Value addition by P/E drive
growth and debt reduction

Compute IRR from given exit value and

shares of other stakeholders
• Valuation – Portfolio companies (Venture Capital Method)
I. Mainly used for valuing VC ( to derive
value/cap for acquiring stake)*
II. Reverse computation

Pre-money valuation : value prior to funding

round
Post money valuation: Value post funding

POST = PRE + Investment

P/E vs Venture Capital
 Top Private Equites

Global India
• Advent International • ICICI Venture Fund Management
• Kotak Private Equity Group
• Apollo Global Management
• Chryscapital
• Blackstone
• Sequoia Capital
• Carlyle
• Blackstone Group
• CVC Capital Partners
• India Value Fund
• EnCap Investments
• Baring Private Equity Partners
• KKR (formerly Kohlberg Kravis
Roberts) • Ascent Capital
• Neuberger Berman • Everstone Cpital
• TPG Capital
• Warburg Pincus
 Top Venture Capital Fund

Global India
• Accel • Sequoia Capital India
• Helion Venture Partners
• Andreessen Horowitz
• Accel Partners
• Benchmark • Nexus Venture Partners
• Index Ventures • Intel Capital India
• Blume Ventures
• Sequoia Capital • Inventus Capital Partners
• Bessemer Venture Partners • IDG India Ventures
• Founders Fund • SAIF Partners

• GGV Capital • BESSEMER Venture Partners

• Bain Capital
• IVP
TOP PE DEALS in 2020